Understanding agile real estate: Drivers and considerations for landlords

8 min read
31/05/2020
By Connor Shugrue

We spoke with Elizabeth Sandler, real estate investment veteran and financial services leader, to gather perspective on the growing demand for flexible real estate.

Market drivers

Flexible lease terms

It is difficult to make predictions about the next six months, but at the same time we have seen a long-term trend towards shorter lease terms. It is a bit like trying to catch a falling knife. Landlords need to be ready to answer what-if questions as tenants will steer clear of getting stuck with a contract that they cannot afford.

Add economic instability to the mix and the question now becomes about strategic decision making. Do you own and control your own building, and gear it up for situations that might include sub-letting space? or do you add a managed space layer to your portfolio via build, buy or partner options? It will be Interesting to see if and how landlords are willing to provide flexibility and the impact it will have on competitive pricing.

It’s worth looking into the emerging and very niche office condo market in the USA market to see how landlords are bringing flexibility to their offering.

Changing occupier behaviours and needs

With the current rise in unemployment, we are likely to see a wave of individual occupiers, freelancers, and entrepreneurial ventures entering the marketplace. At the same time, the coworking end of the flex space market will probably see the introduction of new policies as people have gotten used to quiet time and working without interruptions when working from home – or let’s just assume that is the case for some, while others may be looking forward to fleeing back to the privacy of their offices. Policies could include specific slots earmarked for meetings, meetings in communal areas only and not at desks, or sending a virtual note as a nudge to meet instead of walking up to a desk.

The aesthetic trend that we have seen over the last decade is set to continue. Think quality of lights, common areas, plants, and high ceilings – people are still drawn to these physical aspects.

These policies and design considerations will have an impact on the design of the built environment and the technology required to run it.

The evolving enterprise tenant and niche office space requirements

Currently, most enterprise tenants are bare-bones and logistics driven. They are keeping a keen eye out to see what landlords will be doing and what regulators have in the wings. These tenants are looking at landlords for direction as they evaluate how to get things going again.

Enterprise tenants are thinking about optimizing their footprint rather than de-densification. When it comes to ripping out desks, it is simply not an investment that they are keen to make. At the same time, they will welcome conversations about how they can keep their employees productive. In a way, they find themselves squeezed in the middle between what the occupiers need and how landlords are responding.

Opportunities to provide value added services

The big-ticket item is understanding how people engage with space. Landlords and corporate or employer occupiers need insights and datapoints about how people are working rather than just basic login and logout type information.

It may well start with tracking the movement and access patterns of people. But the application and interpretation of data will go well beyond what we are thinking today – linking locations, demographics, and behaviours in new ways. Real estate investors have for a long time understood the value of such data and are keeping it closely guarded. In the same way, data will become hot property for landlords and enterprise tenants.

Financial pressure on landlords

Models are changing fast. We have already seen more conservative LTV models post the financial crisis. Today, it’s also about cash reserves. These pressures will impact the behaviours of landlords. Investors are in an evolving model and are looking at a wide range of options as they consider next steps.

Considerations

Opportunity

Get ready to provide flex solutions – build, buy, partner.

This is a big opportunity. People are open to options, considering risks and becoming creative in a way where they are open to evaluating solutions not previously considered.

Many people have carved out specific opportunities in the value chain. For example, I do this, and do it better than anyone else, so I have a slot in the value chain. Now is a good time to take a step back and have a fresh look at the value chain. Where do you fit in? If you are already in a value chain, you need to consider if there are too many players or perhaps not enough? How are funds and risks distributed? Are there more people paying smaller amounts or less people paying large sums?

Security

Futureproof the asset – be ready for all requirements.

Security is an important area and opportunity for innovation. People will be thinking about security in a different way and it is crucial to consider the full range of security topics – physical, cyber, and health.

Now may also be an opportune time to take stock of how landlords will be able to meet a wider range of occupier needs – from enterprise tenant requirements to start-ups and freelancers.

Tech gap

Effectively bridge the technology knowledge and operating model gap.

Technology is an absolute necessity. When thinking about technology it is interesting to see what other industries are doing. For example, residential real estate with 360-degree cameras to show space. Commercial real estate is just not there yet and can learn a lot from residential real estate.

Think about consumer level experiences. Occupiers will expect space to be at least as innovative as their home and mobile workspace environments, where ordering a coffee from your phone is the new norm.

It is all going to be even more tech relevant. Consider communication, information, access, and tech services that all flow and enable lifestyle and productivity.

Proposition

Landlords to explore partner models to remain relevant.

Generally speaking, landlords want to own and not operate space. They want to maintain physical security but do not want to worry about collecting rent.

If, however, it is possible to provide the same style of services for a suite that landlords deliver for a building, then it becomes interesting for landlords to offer more. Some landlords are owner operators, others are dipping their toes into excess space propositions like ‘hotelling’, and a number are considering offering spec suites to provide more of a turnkey solution.

Most landlords would want stability of revenues right now, meaning that their core business model needs to work without excess space models. But, there is an opportunity to use excess capacity to attract businesses that then become part of the core occupier base in a building over the longer term.

Occupiers will start asking for different space configurations. For example, half floor this year with a ramp to two floors in three years. Landlords that can provide space in this way will have an edge in the market. Technology is a key enabler when working to such a ‘lego’ brick space model.

Risk

Assess risk of space voids.

Landlords are good at managing space voids by looking at usable square foot and densification. The model has not been innovated for a long time and needs work with respect to gaps between tenants, tenant improvements and incentives for filling space.

Landlords will now be thinking of ways to shorten the time between voids, finding ways to make the space more flexible, getting space online quicker or having fully furnished space with rising desks. This means landlords will need to get much closer to tenants to understand how to configure and change space. This may well spell the end of long-term fitout projects.

Change will be driven by finding a balance between what people are willing to live with, for example moving an office wall, versus the time taken to get up and running. Landlords would also want to move fast to reduce gaps between tenants – enter the agile real estate model.

Elizabeth Sandler

Elizabeth joined the essensys board in January 2020. Elizabeth has held leadership roles in the real estate and financial services sectors for the past 25 years in New York and London, most recently as founder and CEO of Echo Juliette (a workplace investment consultancy), and before that at The Blackstone Group, Deutsche Bank, AXA Financial and A.T. Kearney. She was Managing Director and Global COO of Blackstone’s $15bn Real Estate Debt Strategies division from 2016 to 2018, and Managing Director and Global COO of a variety of Deutsche Bank businesses including its Risk Division (2014-16), Structured Finance (2010-2014) and Commercial Real Estate (2005-2010). Elizabeth currently serves on the Board of FS KKR Capital, the NYSE-listed business development company with a $3bn market capitalisation.

In addition to being a Non-executive Director of essensys, Elizabeth is director and founder of Echo Juliette LLC and a non-executive director of FS KKR Capital Corp. and Crosswind Capital, LLC.

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In this article

  • Market drivers
  • Flexible lease terms
  • Changing occupier behaviours and needs
  • The evolving enterprise tenant and niche office space requirements
  • Opportunities to provide value added services
  • Financial pressure on landlords
  • Considerations
  • Opportunity
  • Security
  • Tech gap
  • Proposition
  • Risk
  • Elizabeth Sandler

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